The perfect storm has formed, and the time to get into construction-to-perm lending is now. Single-family construction is taking off, despite the fact that interest rates are rising and market forces, such as lack of inventory, have all had a hand in the metaphorical construction-to-perm (CP) storm.
Fueled by digitization throughout the entire mortgage industry, construction-to-perm is transforming from an antiquated process via spreadsheets, paper files and email to one that is streamlined and user-friendly.
Read on to discover the 8 reasons why now is the perfect time to jump into construction-to-perm lending.
1. Lack of Inventory and Rising Costs
According to the National Association of REALTORS® Chief Economist, Lawrence Yun, there’s “a troubling shortage” of purchase inventory around the country. “Housing shortages are the rule in most states and there’s no reason to expect anything to change this year…There are essentially two major consequences of a persistent housing shortage: a continuing steep rise in housing costs and people needing to double or triple up to afford a home,” Yun wrote in a recent blog post. Take advantage of CP while these market forces are in your favor.
2. Less Competition in Construction-to-Perm Space
With refis waning, you’ll want to find the quickest way to replace lost revenue. Since the competition in the construction-to-perm segment isn’t nearly as tight as other niches, you’ll be able to quickly replace lost revenue, drive more valuable builder referrals and grow your footprint while competitors continue to shrink.
3. Construction-to-Perm Borrowers Tend to Have a Lower Risk Profile
Another advantage lenders have in construction-to-perm is that borrowers in this segment tend to have a lower risk profile. Although builders have seen more barriers to credit since 2008, CP borrowers are typically more sophisticated, with larger loans, higher credit scores and more down payment reserves.
4. The Death of (most) Manual Processes…
Many lenders loathe the manual processes traditionally involved in construction loan administration. Without technology, managing the draw process and making sure all parties are on the same page is like herding cats. Not to mention, due to human error, the manual process of construction loan administration often introduced additional risk to the loan. But now, with the technology available to all lenders, those days are over. Advancements in technology have drastically removed the common human errors and can give a lender (and all the other stakeholders to the loan) a completely transparent picture of the loan and project status.
5. …and the Birth of Construction-to-Perm Software
Finally, technology options are available to make construction loan administration easier and faster for loan officers. Streamlining internal processes and removing extra work from loan officers is just the beginning of the benefits of technology. The same technology has even larger implications, and can actually bring you more builder referrals because of enhanced borrower experience and faster draw turn times.
6. Construction-to-Perm Software Naturally Builds Relationships and Referrals
Many lenders evaluating construction-to-perm offerings also worry about how to develop consistent pipelines, but some of the most successful CP programs we see are turning builders and contractors into the most powerful referral sources. How? The construction loan administration process makes it easy to work with you, reduces draw times and gives everyone a far better experience in managing the project.
If you focus on growing your relationships with builders now, you will be in a great position to tap into the profitable CP segment. Many great tips for establishing referral relationships with builders have already been shared: Check out Ben Smidt’s ideas for optimizing your builder referral sources and Karen Maierle’s article on planning events with your referral partners.
7. Faster Draws Empower Contractors
With technology-backed construction loan administration, your builders will have what they need to build their businesses most effectively. With online draw requests and collaboration through software, builders can see draw request approvals reduced by more than 2 days. This is critical for builders because faster draws empower them to pay their valued contractors immediately – faster than their competitors pay. Money talks, so your fast draws give builders the ability to develop strong relationships with the best suppliers in their markets.
8. Real-Time Control Means the Client Experience has Never Been Better
Builders and lenders are focused on client experience to differentiate themselves from competitors. With online construction loan administration tools, the borrower and builder experience improves dramatically. Borrowers want the same level of technology available in personal banking, and they don’t want to be hassled by paper forms, phone calls, emails, long delays and manual processes when they could have real-time control.
Construction-to-perm software allows all parties to have access to loan status anytime, and they can easily collaborate with all the stakeholders of the project. Of course, faster draws have a significant impact on overall client experience, too – and can single handedly make you the top LO for CP loans in your market. The builder’s administration burdens are substantially reduced, allowing them to provide far better customer service and focus on what they do best – building more houses and referring more borrowers to you.
This all leads to real results.
We’ve seen institutions where up to 60% of new loans are builder referrals based on ease of doing business. Builders refer borrowers to these lenders because technology gives them the ability to initiate and co-pilot the entire process with their client. Gone are the days of having their hands tied behind their back with a client unfamiliar with the construction lending process.
Are you ready to jump into construction-to-perm lending?
Everyone sees the opportunities in construction-to-perm lending, but there have always been challenges to the loan administration process that could derail your best efforts – until now. The time is right to make your move in the CP niche. Economic factors are in your favor, plus the technology exists to truly set yourself apart and grow your reputation as the go-to loan officer for builders in your area.